As he jetted to London for the G-20 economic summit, President Barack Obama enjoyed all the comforts of a modern office.

No, we’re not talking about ergonomically correct chairs. Forget about the conference room or the 4,000 square feet of space that Air Force One affords. More importantly, the heavily modified Boeing 747 offers the President something most airline passengers lack: broadband communications.

But the clouds of profound change hang on the horizon. Industry executives predict at least 40% of commercial aircraft will offer some form of wireless broadband information and entertainment in the next six years. Bandwidth is suddenly one of the hottest “commodities” around.

Demand for Wireless Connectivity Grows Exponentially

A fast-growing, small-cap company near Atlanta, Ga., stands to profit from the burgeoning market for in-flight broadband connectivity. EMS Technologies (ELMG:NASDAQ) services the commercial aircraft industry as well as the Pentagon.

Despite the soft economy, business travelers want more bandwidth. So do military officials. Both need access to laptops, personal digital assistants, and cellular or satellite phones while streaming across the skies. Military leaders also must have sophisticated cockpit communications to make U.S. forces ever more lethal. Real-time video of enemy troops movements is itself a force multiplier.

From the early 1990s to the start of the second Iraq war, military demand for satellite bandwidth soared tenfold. That type of growth isn’t sustainable.

But don’t worry. The Government Accountability Office predicts a fivefold surge in less than a decade…

This explains why the super-stealth B-2 Bomber is undergoing a satellite communications upgrade. The price tag: nearly $200 million. Meantime, the sleek F-22 Raptor fighter operates with a high-speed data link as it stalks targets. EMS supplies critical communications equipment for both planes.

In the civilian market, EMS jointly developed the eXconnect broadband antenna with Panasonic Avionics Corp. Panasonic serves more than 200 customers globally. Its systems fly on more than 3,700 aircraft.

Founded 41 years ago by a research executive from Scientific-Atlanta, EMS services an important third market. Last year, the company had $146 million in revenue from its logistics division, where it remains the leader in vehicle mounted computers.

At the end of 2008, EMS had a $115 million backlog of orders for defense and space sales. A new record for the company, the figure represented a 75% jump from 2007 levels.

Acquisition Targets $700 Million Machine Communications Market

Last December, EMS pulled off a merger that enhances its position as an in-flight communications provider. The company paid $40 million to buy Formation, Inc.

Based in Morristown, N.J., Formation is an approved direct supplier to industry titan Airbus. It has long-standing relationships with Aircell, Panasonic and Rockwell Collins.

More importantly, Formation found the sweet spot. Its fastest-growing products are rugged servers and wireless access points for airplanes.

Sound dull? Consider this: The equipment extends connections to laptops and personal digital assistants for passengers. No wonder Formation has had annual compound growth of 30% since 2006. In 2007, sales jumped 57%.

Formation has delivered more than 2,500 avionics-class servers and 110,000 other avionics products. The Formation deal represented the fourth acquisition EMS made late last year.

EMS also purchased Satamatics Global Ltd. The move gave EMS a strong position in the fast-growing market for satellite machine-to-machine (M2M) communications.

Consultants Frost & Sullivan predict the satellite M2M market will grow 17% this year to approximately $700 million. The trend helped U.K.-based Satamatics register a three-year compound annual growth rate of 29%.

Founded in 2001, Satamatics enables organizations to locate, track and communicate with mobile assets. The technology also is used to safeguard fleets, cargo and personnel, while monitoring fixed assets deployed globally.

EMS predicts operating income from the acquisition of between $3 million and $5 million this year. The combined operations will prove particularly helpful in the satellite-based helicopter and military-vehicle tracking businesses. It also will help with road transport markets in South America, Africa and the Middle East.

Driven CEO Emphasizes Growth, Improved Profits

Who says paranoia doesn’t pay? Just ask CEO Paul Domorski, who joined EMS in June 2006. This incredibly driven executive would be the first to acknowledge that he tends to run a little scared. Then again, he hates surprises.

Domorski constantly surveys the federal and commercial markets for any signs of new trends that could impact EMS’s bottom line. In this confusing economic climate, that’s a great trait in a business leader.

He openly admits that business success is a major motivator in his life. Thus, investors can rest assured that Domorski will throw all his energies into making EMS a major financial success. It’s in his DNA.

Perhaps I should explain why I put so much emphasis on Domorski’s talents. When I recommend a technology company, I look at three primary factors: a good suite of products in a healthy market, reasonably consistent profits, and visionary leadership with hands-on abilities.

I have lived near Silicon Valley for the past 25 years and have seen a lot of exciting technology companies go bust. Though each story is different, management mistakes almost always lead the list.

EMS needed Domorski’s expertise. Though it maintained strong earnings from operations, the company had net losses in two of the four years before he climbed into the chief executive’s chair.

Domorski has significant turnaround experience. A former Avaya vice president, he also served as a consultant and the president of RSL Communications Ltd. during its restructuring. Before that he ran a company that had been organized out of several British Telecom businesses.

Increasing 2009 Earnings Despite Soft Logistics Market

It’s a great fit. EMS has a long history of innovation, the right products for military and commercial clients who want enhanced wireless capabilities, and a CEO who constantly thinks about making money.

So far at EMS, Domorski is on a roll. In the past 18 months, he has generated increasing media coverage. That’s important because when it comes to branding a company, nothing beats earned buzz.

Giving EMS a higher profile can help the company win new customers, improve employee morale, and edge out the competition. Would you rather eat at a restaurant you never heard of or one that is Zagat rated?

On April 9, EMS acknowledged the soft economy is affecting its logistics business. The company backed off earlier projections of sharply higher earnings per share. The company estimates a low end of $1.35, about a nickel more than it reported last year.

However, for the past six years, EMS registered a compound growth rate of approximately 12%. At that rate, EMS could generate revenues of $670 million in six years. It could become a $1 billion enterprise in just over a decade.

Earnings from continuing operations remained strong. They climbed 82% from $10.75 million in 2003, the first full year after the previous technology recession, to $19.6 million for 2008.

At its core, EMS remains an efficient, well-run company. Operating earnings don’t include interest income or expenses or the impact of foreign currency. After subtracting the cost of sales, general overhead and research and development, EMS earns about 6% on its revenues.

Last year profits rose 9.6% from the previous year to $20.5 million. That translates to earnings per share of $1.31, up 8.3% from the $1.21 posted in 2007.

The recent string of solid earnings means the company has a stable upward trajectory after some tumultuous years earlier this decade. Despite strong operating earnings, EMS lost money in 2003 and 2005 when it had significant expenses from discontinuing some operations.

This year and next it could generate windfall profits from a dollar made weak by rising U.S. deficits and dramatically higher money supplies. EMS gets one-third of its sales from overseas.

Defense and Space Revenues Rise 35% in Two Years

For the Air Force, EMS has gear on all 90 F-22 Raptors in operation. EMS supplies the fifth-generation attack aircraft with the Intraflight Data Link antenna system. The benefits: low size, weight and power with no moving parts.

These features contribute to the F-22’s covertness without sacrificing performance. EMS began work with Lockheed Martin at the program’s inception in the early 1990s. It received a $12 million follow-up order in July 2007 that contributes income through next year.

Defense Secretary Robert Gates recently recommended the U.S. limit F-22 procurement to a total of 187 planes, a cut of four aircraft from the current plans. Should Congress agree, that won’t affect EMS’s bottom line.

The F-22 work represents only about 3% total defense business for EMS. The company has firm production revenue through 2010 with anticipated orders that will extend production through 2011.

The Navy plans to buy 500 MH-60R Seahawk helicopters designed for search and rescue. EMS’s antenna system will be in the nose and tail of each Sikorsky-built aircraft. Harris Corp., the leader in battlefield radios, will use the EMS antennas to process video, radar, acoustic and sensor data for Seahawk terminals.

Meantime, EMS supplies anti-jamming hardware for Lockheed Martin’s next-generation military satellites. EMS also offers low-profile tactical and Satcom radio frequency systems in the emerging net-centric warfare communications-on-the-move market.

Overall, EMS says its defense division posted 35% growth since January 2007. At press time, the company neared completion of a new 30,000-square-foot facility designed to meet growing demand.

B-2 Bomber Communications Upgrades Add $35 Million in Sales

Known for its distinctive “flying wing” shape, the B-2 Bomber is the flagship of the nation’s arsenal of long-range attack aircraft. Equipped with an array of stealth technology, the heavy bomber can fly 6,000 nautical miles without refueling. It can penetrate heavy anti-aircraft defenses to drop both conventional and nuclear payloads.

DoD officials also want to give the B-2 minimal susceptibility to enemy jamming and eavesdropping. Furthermore, Air Force officers designed the program to achieve secure high-speed communications with low-profile antennas.

That’s where EMS comes in. The company received a contract in February valued at $35.7 million for continued concept advanced development work for the B-2’s satellite communications system. EMS says funding will run through July of this year.

Meantime, the Air Force plans to retrofit all 20 B-2s flying today with the EHF system. With developmental items, production units and spares, the contracts could include a total of 30 systems.

EMS began work on the high frequency program at its inception in 2004. To date it has booked more than $50 million in revenue from the B-2 upgrades. Thus, EMS is helping make the B-2 more lethal. When it comes to battlefield information, speed kills.

By comparison, the aircraft’s current communications system rides along at a mile per hour as though it were an old jalopy running on fumes. With EHF, data travels like a super-charged Porsche barreling down the freeway at 100 miles an hour.

The company cleared two major program milestones last year. In April, EMS received a $13 million award to continue key risk-reduction work on the antenna design. The month before, EMS completed development of the antenna and demonstrated its feasibility.

Thus, with so many products plugged into the military, commercial aviation and satellite markets, EMS is poised for additional growth and higher profits. The company can connect people from the warehouse floor to outer space.

Recommendation: Consider EMS Technologies (ELMG:NASDAQ) for your portfolio. An unexpected surge in the dollar’s value remains the biggest threat, but management uses forward currency contracts to reduce risk. Earnings should increase further in 2010 with growth in the logistics market.

Originally published July 29, 2009.

Other Related Topics: Airline Industry , BreakAway Investor , Commodities Investment , Information Technology , Michael Robinson , Military , Small Caps Stocks

Other Articles Related To This Topic:

Comments (0)